Will Anyone Hold Jamie Dimon Responsible for the London Whale Scandal?

In a post earlier this year, I asked whether the “London Whale,” Bruno Iksil, a London-based derivatives trader for JPMorgan Chase, who racked up billions of dollars in losses early last year, would end up swallowing Jamie Dimon, the chairman and chief executive of the bank, which is America’s largest. Now we have our answer: no. Far from being devoured by the trading scandal, which has spawned a congressional investigation and seen two of Iksil’s former colleagues in London indicted on criminal charges of trying to disguise his losses, Dimon has emerged largely unscathed. Unlike Captain Ahab, he’s swimming away from the deadly cetacean with barely a bite mark.

To settle civil charges arising from the trading scandal, Dimon’s firm was forced to pay $920 million in fines, which is one of the biggest financial penalties yet levied on a financial institution. But megabanks like JPMorgan are so big these days that they can easily afford to pay out the odd billion dollars. Indeed, for heavily regulated entities that make much of their profits from trading and market-making, paying large fines is rapidly becoming just another cost of doing business—and not one that is prohibitive. In the second quarter of this year alone, JPMorgan made a net profit of $6.5 billion. In the twelve months to June, it made $24.4 billion. The London Whale fine is less than four per cent of the firm’s annual profits. Among JPMorgan’s investors, there is widespread relief that the settlement wasn’t more punitive—and that Dimon has been spared.

In a three-hundred-page report published in March of this year, the Senate’s Permanent Subcommittee on Investigations tied Dimon directly to the risky trading activities of Iksil and his colleagues in JPMorgan’s Chief Investment Office, which was supposed to hedge risks that the bank was exposed to elsewhere, but which actually operated like an internal hedge fund, taking huge bets on the direction of market movements. In January, 2012, a few months before Iksil’s losses were revealed, his trading desk was making such large investments that it breached JPMorgan’s internal risk guidelines for the entire bank. On being informed of this, Dimon personally approved a temporary increase in the desk’s trading limits, and he also approved the introduction of a new mathematical model for measuring risk, which had the effect of lowering the internal estimate of possible losses by up to fifty per cent.

None of this stuff featured in the coördinated global settlement that the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve, and the United Kingdom’s Financial Conduct Authority arrived at with the firm. Nor did the Senate Sub-Committee’s claim that, once news of Iksil’s losses emerged, Dimon and other senior JP Morgan executives deliberately misled regulators and the public about how big they were. After the settlement was announced, much was made of the fact that the had S.E.C. insisted on the bank admitting that it had violated certain laws. But the “crimes” it copped to were of a technical and limited nature: failing to maintain adequate internal controls and procedures, misstating its financial results, and failing to keep the audit committee of its board of directors properly informed about the size of Iksil’s losses.

In effect, JPMorgan, in agreeing to the settlement, was admitting something Dimon has already conceded: we screwed up. As long ago as last May, Dimon said on a conference call that Iksil’s trade were “poorly monitored and poorly constructed and poorly reviewed and all that.” The settlement contains no admission of fraud, reckless risk-taking, or deliberately misleading investors—a point noted by Senator Carl Levin, the Michigan Democrat who heads the Permanent Subcommittee on Investigations, and who has been pushing for tougher sanctions on too-big-to-fail banks like JP Morgan. “The size of the penalties is testimony to the great damage risky derivatives bets can do, and that’s important,” Levin said in a statement. “However, the whole issue of misinforming investors and the public is conspicuously absent from the SEC findings and settlement. Our PSI investigation showed that senior bank executives made a series of inaccurate statements that misinformed investors and the public as the London Whale disaster unfolded.”

In a statement announcing that, as part of the overall settlement, JPMorgan had agreed to pay a fine of two hundred million dollars to the British government, the Financial Conduct Authority, the U.K.’s main financial-regulatory agency, did bring up the bank’s misleading statements and stonewalling after Iksil’s losses emerged. “During the first half of 2012, JPMorgan failed to be open and co-operative with the FCA in that it concealed the extent of the losses as well as numerous serious and significant issues regarding the situation in the” huge derivatives portfolio that Iksil and his colleagues had constructed, the agency said. “JP Morgan’s failings were extremely serious and undermined trust and confidence in UK financial markets.”

But if that’s the case, why haven’t the F.C.A. and the other regulators demanded more scalps in JPMorgan’s executive suite, and, perhaps, even the resignation of Dimon? It’s surely not too much that megabanks that enjoy an implicit guarantee from the taxpayers don’t allow their traders to build up huge derivatives positions unchallenged by senior managers. (At one point, the notional exposure of Iksil’s derivatives portfolio was more than a hundred and fifty billion dollars.) And surely such banks can’t be permitted to mislead, or stonewall, their regulators.

If Dimon wasn’t responsible for the glaring failure to supervise Iksil and his colleagues, and for the bank’s misleading statements after the losses emerged, who was? Martin Artajo, Iksil’s immediate supervisor, whom the Justice Department has accused of trying to disguise his losses? Hardly. Artajo, who is currently in Spain fighting extradition to the United States, was a fairly lowly figure in the bank. He had little to do with how it was run, or how it communicated with the outside world. Ina Drew, the former head of the Chief Investment Office, who resigned last year and offered to return two years of compensation? She was a protégé of Dimon and she reported to him personally. But she wasn’t responsible for some of the bank’s key failures, such as introducing a new risk model that greatly understated the risks that Iksil and others were taking.

The truth is that big banks like JPMorgan are hugely complicated organizations, in which no one person can be aware of everything that is going on, or even hope to forestall all possible problems from emerging. When it comes to keeping the bank’s traders on a leash, about the best that can be expected is that the person, or people, in charge set up a proper system of internal checks and controls, including strict limits on leverage, meaningful risk guidelines, and accurate valuation metrics. But, in at least two of these three areas, JPMorgan appears to have fallen short. Again, if that wasn’t Dimon’s responsibility, whose responsibility was it?

Since the regulators have taken a pass on answering this question, it is left to JPMorgan’s board or directors to pursue it. After all, they were among the folks who were misled. In April of last year, according to the cease-and-desist order that the S.E.C. published on Thursday, some of the bank’s senior executives learned that Iksil and his fellow traders were inflating the value of their trades by up to seven hundred and fifty million dollars. But Dimon and his colleagues failed to inform the board, and, in particular, it’s audit committee, which is responsible for making sure that the bank gives out accurate numbers. In a statement, George Canellos, the co-director of the S.E.C.’s enforcement division, said “JPMorgan’s senior management broke a cardinal rule of corporate governance and deprived its board of critical information.”

In the wake of the legal settlement, maybe the board will haul Dimon before it and ask him to explain how this happened. Perhaps it will even force him to give up one of his titles—he is currently the bank’s chairman and chief executive—an idea that he has strongly resisted but which, earlier this year, gained the backing of about a third of the bank’s shareholders.

What, you don’t think that is very likely to happen? O.K., I’ll let you in on a secret: neither do I.